Restructuring Argentina's airline networks: Successes and challenges

Argentina's aviation networks underwent significant restructuring after the 2015 election of President Mauricio Macri. Historically constrained by poor aviation infrastructure, economic uncertainty, currency devaluations, labor unrest, comparatively weak passenger demand, and operational barriers to low-cost carriers (LCCs), Argentina's airline networks have experienced deep restructuring in both providers and network interactions. With less than 0.3 trips per capita in Argentina, compared to 3.0 in the mature U.S. aviation market, analysts argue that there is significant potential for moving bus and automobile travelers to airlines, and to expanding Argentina's airline connectivity profitably throughout the region. LCCs such as Flybondi, Norwegian, Air Europa, Sky, JetSmart, and others are challenging long-standing transportation relationships in the region and developing new routes for consumers. A set of interlinked questions aims to understand Argentina's changing aviation geography. Comparing O-D data from 1972, 1982, 1996, and 2019, the results indicate a significant reorganization of Argentinas domestic and regional network interactions, with modest adjustments to its global north-south connections. Challenges include outcomes of a recent change in Argentina's government and the long-term impact of the global COVID19 pandemic on the aviation system.     

A GHG reduction obligation for sustainable aviation fuels (SAF) in the EU and in Germany

Despite various legal drivers already in place, a large-scale use of sustainable aviation fuels (SAF) is still missing. Thus, bringing SAF for GHG reduction reasons into the day-to-day business more effective market injection mechanisms are needed. In this context, direct and indirect effects of a greenhouse gas (GHG) reduction obligation in the EU and in Germany are analysed, considering an obligation level of 2% in 2023 increasing stepwise to 10% by 2030 following the goals derived from transport-related RED II targets. For such GHG reduction obligations referred to the entire EU 27 and the entire German aviation fuel uplifts, obligation induced SAF demands possibly exceed future SAF production quantities by a factor of about two without effective capacity expansion exceeding the published expansion plans. The considered SAF options lead to an aviation fuel price increases of 5–45% referring to a conventional aviation fuel price of 550 €/t. Aviation related EU ETS and German aviation tax revenues are mostly insufficient to significantly cover obligation-induced SAF costs or additional fuel costs. Fostering a broad spectrum of SAF technologies will thus require obligation related sub-mechanisms, due to (significantly) different SAF compliance costs. Thereby, sub-mandates represent the most effective approach. In terms of obligation avoidance measures, tankering – in contrast to three re-routing options considered – is likely to be economically feasible for airlines and requires appropriate countermeasures.     

The impact of carbon emission fees on passenger demand and air fares: A game theoretic approach

The implementation of an environmental market-based measure on U.S. aviation industry is studied. Under this policy, each airline pays a carbon fee for the carbon dioxide emissions it generates. The impact on ticket prices and corresponding market shares is investigated via the joint estimation of an air travel demand model and an airlines' behavior model. In the demand model, aggregate air traffic data is used to determine the marginal effects of flight attributes that are specific to itinerary, airline and airport on market share. The airline's behavior model incorporates the carbon fee in the airline marginal cost. After the implementation of the carbon policy, the increased cost forces airlines to adjust ticket prices in order to maximize profits. The results obtained by the proposed model indicate a moderate price increase which strongly depends on the per tonne carbon price. Air travel demand falls from 2.4% to 21% depending on the carbon price level.     

The emergence and effects of the ultra-low cost carrier (ULCC) business model in the U.S. airline industry

The effects of “low cost carriers” (LCCs) such as Southwest Airlines and JetBlue Airways on the competitive landscape of the U.S. airline industry have been thoroughly documented in the academic literature and the popular press. However, the more recent emergence of another distinct airline business model—the “ultra low cost carrier” (ULCC)—has received considerably less attention. By focusing on cost efficiencies and unbundled service offerings, the ULCCs have been able to undercut the fares of both traditional network and low-cost carriers in the markets they serve.In this paper, we conduct an analysis of ULCCs in the U.S. aviation industry and demonstrate how these carriers' business models, costs, and effects on air transportation markets differ from those of the traditional LCCs. We first describe the factors that have enabled ULCCs to achieve a cost advantage over traditional LCCs and network legacy carriers. Then, using econometric models, we examine the effects of ULCC and LCC presence, entry, and exit on base airfares in 3,004 U.S. air transportation markets from 2010 to 2015. We find that in 2015, ULCC presence in a market was associated with market base fares 21% lower than average, as compared to an 8% average reduction for LCC presence. We also find that while ULCC and LCC entry both result in a 14% average reduction in fares one year after entry, ULCCs are three times as likely to abandon a market within two years of entry than are the LCCs. The results suggest that the ULCCs represent a distinct business model from traditional LCCs and that as the ULCCs grow, they will continue to play a unique and increasingly important role in the U.S. airline industry.     

Drivers and barriers to online airline ticket purchasing

Although online sales of airline tickets are growing, many travellers are still reluctant to use the web as a purchase channel. Given the cost advantages of online sales for airlines, it is useful for them to know the main drivers and barriers affecting the use of the Internet to purchase tickets. This study analyses the influence of risk, perceived usefulness and perceived ease of use on the airline ticket online purchase intention. The results of a survey show that perceived purchase risk and perceived usefulness exercise a direct influence on airline ticket purchasing intentions, while perceived ease of use has an indirect influence through perceived usefulness. Psychological risk, performance risk and privacy risk are the predominant perceived risk dimensions in airline tickets purchase, whereas social risk and time loss risk are negligible.     

Drivers of operational efficiency and its impact on market performance in the Indian Airline industry

India is considered to be one of the toughest aviation markets in the world, due to high fuel prices, overcapacity and intense price competition. It is therefore important to identify critical drivers of performance, which enable the airlines to survive and succeed in this emerging market with huge growth potential. In the current empirical study, we investigate the linkages between various performance drivers, operational efficiencies and market performance. An extensive data collection using primary and secondary sources enabled us to gather data on all the airlines operating in India, both private and public, for the period 2005–2012, on a variety of important parameters. We carried out a two-stage empirical analysis, which involved estimation of operational efficiencies during the first stage using Data Envelopment Analysis, and determination of performance drivers during the second stage using a two-way random effects GLS regression and also a Tobit model. Our findings suggest that while some of the structural and regulatory factors have an undesirable impact on airline performance, the low cost carriers in India have managed to achieve significant operational efficiencies. In addition, we find that, while cost efficiency is driven by a variety of factors, it is the technical efficiency which brings in better market performance through pricing power in the Indian airline industry.     

A model to forecast airport-level General Aviation demand

General Aviation (GA) demand forecast plays an important role in aviation management, planning and policy making. The objective of this paper is to develop an airport-level GA demand forecast model. The GA demand at an airport is modeled as a function of social-economic and demographic factors, the availability of supply factors, the competition from the commercial aviation, the number of based aircraft, and the presence of a flight school. Our models suggest that the relative fuel price – fuel price compared with personal income – is a significant determinant of airport level GA demand. The elasticity of itinerant and local GA demand with respect to the relative fuel price is −0.43 and −0.52, respectively. Our results are compared with those reported in other studies. Furthermore, we made projections of GA demand for the airports in the Terminal Area Forecast (TAF) using three fuel price scenarios from the Energy Information Administration. Our projections under the “business-as-usual” fuel price scenario are close to those in the TAF. Our models could prove useful, for example, for the Federal Aviation Administration and airport planners to prepare airport-level GA demand forecast.     

Air transport globalization, liberalization and sustainability: post-2001 policy dynamics in the United States and Europe

Against a context of international crisis in the air transport industry, this paper examines the implications of the ways in which strategies developed by key air transport stakeholders, as well as the contemporary dynamics of the globalized, liberalized market place, impact directly on sustainability issues. More specifically, the paper has two objectives. First, it discusses the policy ramifications of the interrelationships between the concepts of globalization, liberalization, and sustainability within the air transport industry. Second, the paper explores the import of these interrelationships as they interconnect with stakeholder strategies in the differing geopolitical contexts of the US and EU. Particular attention is given to airline network and frequency strategies. The paper concludes that while the financial sustainability of the airline industry is the overwhelming concern today, if this is essentially the short-term crisis that the airline industry claims it to be, the longer-term predictions of air transport growth will again bring environmental sustainability issues to the fore.     

Including aviation emissions in the EU ETS: Much ado about nothing? A review

The European Community, motivated by the rapid growth of the aviation industry and related impacts on climate change, has decided to include aviation in the European Emissions Trading Scheme (EU ETS). Mitigation policies such as the EU ETS are considered to be necessary in order to change travel behaviour and induce operational and technological changes in the aviation industry that will result in lower environmental impacts. This paper reviews the available impact assessments of the proposed emissions trading scheme for airlines published between 2005 and 2009. It analyses the methods used and finds that the models used are often over-simplified, omitting important variables or that the reliability and robustness of the modelling results are reduced by linking models that are based on different assumptions. The paper also summarises the possible environmental (CO₂ emissions) and economic (air fares, demand for airline services, supply of airline services, competitiveness, GDP, carbon price) impacts in the studies reviewed for the year 2020. Overall, the effects are found to be small: for example, CO₂ emissions are expected to decline by a maximum of 3.8% and the maximum impact on GDP in the EU was found to be ?0.002%. The reasons for these insignificant impacts are analysed in this paper; it is also found that there are some positive aspects of including aviation in the EU ETS.     

What determines the effectiveness of barriers to entry in liberalised airline markets?

Hypotheses are derived concerning the effectiveness of entry barriers in deterring route entry in liberalised airline markets. Survey data are used to reflect the perception of airline managers in Australia/New Zealand, Canada, the European Union (EU) and the US. We find that industry conditions, and an entrant's objectives, characteristics and strategies influence the effectiveness of entry conditions in hindering entry. The results suggest that effectiveness is a function of the perceived height of the barrier, the perceived ability of the entrant to overcome it, and the reward expected from entry.     

The evolving landscape of Chinese aviation policies and impact of a deregulating environment on Chinese carriers

This paper examines the recent developments of China’s aviation polices focusing on airline consolidation, the opening up of the domestic aviation market, and the adoption of more liberal international aviation policy. It then goes onto assess the impacts of the above policies on the industry structure, the performance of major airlines, and the competitiveness of Chinese airlines in international markets. The study shows that the industry became more competitive following the opening up of the domestic aviation market. Although major airlines saw an increase in passenger volume and an improvement in load factors, the falling yield and rising costs make them difficult to grow profitably. Moreover, Chinese airlines largely failed to capitalise on building an international network and the majors were weak in international competition. Strategic use of aviation policy to build a strong and profitable airline industry is still a formidable task lying ahead for policymakers.     

Commodity price pass-through in the US airline industry and the hidden perks of consolidation

How do changing jet fuel prices impact airline revenues? As expenses for jet fuel are one of the most relevant cost factors for airlines, their economic success largely depends on the ability to match changes on the cost side with an adaption on the revenue side. While previous studies primarily focused on the impact of fuel price changes to consumer prices, this paper empirically examines the ability of US airlines to pass-through lagged jet fuel prices to scaled operating revenues from an airline driven perspective. Our results suggest that the extent to which an exogenous increase in fuel prices can be passed on to revenues will deviate according to the competitive situation faced by an airline. Based on these findings our research should also be of interest for European policy makers who are discussing actions to exogenously increase jet fuel prices due to environmental reasons.     

Determining flight frequencies on an airline network with demand–supply interactions

This paper determines flight frequencies on an airline network with demand–supply interactions between passenger demand and flight frequencies. The model consists of two submodels, a passenger airline flight choice model and an airline flight frequency programming model. The demand–supply interactions relevant to determining flight frequency on an airline’s network are analyzed by integrating these two submodels. The necessary condition for the convergence of the demand–supply interaction is discussed. An example demonstrates the feasibility of applying the proposed models. The results are more accurate than those obtained without considering demand–supply interactions, and the models provide ways to consider demand–supply interactions well in advance to determine flight frequencies on an airline network.     

Emissions trading for international aviation—an estimation of the economic impact on selected European airlines

International aviation is responsible for between 2.5% and 3% of anthropogenic carbon dioxide (CO₂) emissions that are partly held responsible for climate change. International aviation is not subject to any regulatory framework for the limitation of these emissions. From an economic point of view, the introduction of an emissions trading scheme would be an appropriate instrument to limit these emissions. This paper outlines the possibilities on how aviation could be included in existing emissions trading schemes and gives an overview on the current political discussion. It continues with an empirical estimation of the impacts on operating costs and transport demand for low cost, full service, holiday and regional airlines taking Ryanair, Lufthansa, Condor and Air Dolomiti as examples, under three different design options for an emissions trading scheme. Finally, conclusions about the impacts on intra-European and worldwide airline competition are drawn.     

Designing aviation networks under Public Service Obligations (PSO): A case study in Greece

The present paper explores a Greek case study on optimizing the design of aviation networks under Public Service Obligations (PSO). Based on previous research on airline PSO networks applied to the case studies of the Azores and Norway, optimization models are adapted to minimize not only the cost to the airline, but also the total social costs. Different predictive models to estimate demand are developed and included in the optimization models. It is found that after applying the developed demand and optimization models, the total network costs can be reduced significantly, compared to the actual network's operation ranging from 4% to 20%.     

Observations of fundamental changes in the demand for aviation services

This paper addresses the seemingly inexorable decline in yield in the airline industry. The external shocks to the industry of the terrorist attacks of 9/11/2001, wars in Afghanistan and the Arabian Gulf and SARS all had downward impacts on the demand for air travel. However, these effects mask a more fundamental change in the demand for aviation services. The analysis uses published sources and a survey of 264 travellers to examine the fall in yields. The traffic mix of economy, business and first class passengers is shown to have changed over a 10 year period as proportionally more travellers choose to use economy class products. This combined with a fall in yield by a third in this cabin during the same period has lead to a significant fall in industrywide yields. Behavioural shifts in business travel and leisure demand are examined. Business travellers have switched from business class products as the difference between business class and leisure fares have increased significantly and as economy class and low-cost carrier products are increasingly viewed as acceptable for business traveller needs, particularly in short-haul markets. Leisure travel has increased as low-cost carriers have introduced low fares, generating new traffic and winning market share from scheduled and charter airline competitors alike.     

The spatial and temporal dimensions of the interdependence between the airline industry and the Chinese economy

The airline industry contributes largely to the economic development of a region. At the same time, the fortunes of the industry can also be affected by regional economic change. This paper uses geographically weighted correlation analysis to investigate the spatial heterogeneity and temporal change of this interdependence as seen in China over the years from 2005 to 2016. The results show that the interdependence between the airline industry and provincial economies is non-stationary, generally with a spatial variation along the east-west axis across China's provinces. Further, the temporal change in the interdependence was affected by specific economic changes, such as the global crisis of 2008, when it weakened. Specifically, air passenger activities in the eastern provinces were more sensitive to some economic changes of 2012, while air freight activities in the western and central provinces were more sensitive to the global economic crisis of 2008. The size of urban agglomeration and regional GDP also influence the spatial heterogeneity of this interdependence with weaker links as GDP increases. It is possible that liberalization of the airline industry could enhance the interdependence in advanced regions. Thus, our results provide significant policy implications for a joint focus on the development of the regional economy and the airline industry.     

The economics and geography of regional airline services in six countries

Do the determinants of service and pricing on “regional” routes – linking towns and smaller cities to main trunk routes and/or to each other – differ from the established results from the literature? We study all flights (about 3000) on all regional routes (about 250) with scheduled airline service from one of about 130 regional towns or cities, in regional airline markets in six countries: Australia, Canada, New Zealand, Norway, Sweden, and a sample of three U.S. states which closely resemble the other regions studied. For each flight we have observations on up to five prices offered at different times before flight date. We also have equipment type and social-economic data. Overall, our results give qualified support to the standard gravity model of the extent of service between city pairs, though with two interesting differences: operators on regional routes have greater flexibility in the size of aircraft they can deploy, which results in a finer-grained variability of service offerings and, the presence of competition on regional routes has a large effect on the total supply of seats. We are able to successfully estimate a well-specified airfare model, which shows strong effects of competition on prices, quite substantial intertemporal price discrimination, and interesting differences between regional and main trunk route pricing.     

Airline cost changes: To what extent are they passed through to the passenger?

Since the start of the Millennium airline costs have been highly volatile, mainly due to large fluctuations in jet fuel prices. An important question for airlines and regulators is whether airlines are able to pass through cost changes to their prices. Little empirical evidence on the pass-through of costs exists. In this paper, we investigate which pass-through rates are most likely. According to economic theory, the pass-through of costs depends strongly on the type of cost increase (firm-specific or sector-wide) and market conditions (monopoly, oligopoly, perfect competition). In monopolistic markets, the shape of the demand curve also matters (linear, constant elasticity, log, power function). A pass-through rate of 100% is often assumed based on the reasoning that the aviation sector is highly competitive. We analyse market concentration in all airline markets in the world, and generally find a high level of concentration. Additionally, different airlines offer different products based on a variety of factors, including service, flight frequency, legroom, bags allowed on board, flight time and transfer time. Therefore, most aviation markets can be characterised as differentiated oligopolies. As airlines choose their quantities first (flight schedules) and adapt their prices to demand (yield management), we consider the Cournot model the best choice. In such markets, firmspecific cost changes will be passed through by a rate of less than half while sector-wide cost changes are passed through by a rate of more than half. In specific situations, the pass-through rate may be different. Examples are limited airport capacity (congestion), cross-subsidization, and the extent to which there is a level playing field.     

Calculating load factors for the transatlantic airline market using supply and demand data – A note on the identification of gaps in the available airline statistics

This paper takes a critical view of the verification of load factors for the direct transatlantic airline market by combining supply and demand-data. The supply-related data originate from the Official Airline Guide, a well-known data source that contains information on scheduled flights. The demand-related data originate from the Marketing Information Data Transfer database, a data set containing information on actual airline bookings. Combining both data sets enables us to calculate the seat occupancy of direct flights between North-West Europe and the US for 2001. Based on the results, we assess the utility of the joint use of these data sources for aviation economic research, and identify various gaps in the available airline statistics.